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Tax Planning for Individuals under Section 80C

CA Niraj Navindgikar , Last updated: 13 February 2024  
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Well, one could avoid the last month rush in March 2024 and plan the Section 80C Deductions now. Make investment decisions wisely to lower the tax liability during the time of ROI filing for FY 2023-24. (AY 2024-25)

Yes, most of the ROI filing individuals (professionals/salaried persons) know what the Section 80C Deductions are & have already utilized the same. Hence, this article may be helpful for those who are not aware about the same or have yet to utilize the full limit available under the law. There have been many cases where individuals are not able to fully utilize the threshold limit & end up paying higher taxes. Also, there is a chance that one might forget a certain deduction or inadvertently interpret that one is not eligible for a certain deduction.

Let us understand in short, the gist of Section 80C of Income Tax Act, 1961: The Section provides a list of investments which are tax deductible up to a certain limit & certain expenses which are included under the threshold limit.

Following is the list of investments which an individual can make where such investments up to an amount of Rs. 1.50 Lakhs shall be tax deductible (Provided that the individual has NOT opted for New Scheme of taxation under Section 115BAC):

Tax Planning for Individuals under Section 80C

1. Investment in Tax Saving Fixed Deposit Receipts

Fixed Deposit investments in banks with a lock-in period of 5 years are one of the most simple & safest forms of investment.

In order to gain the benefits, one has to lock the funds for 5 years. FD up to Rs. 1.50 Lakhs shall be allowable under the section. Minimum Investment is Rs. 1000

Taxability: Interest earned on such FD shall be taxable. TDS provisions may apply based on amount of interest.

2. Investment in Employee Provident Fund

EPF is a type of retirement benefit scheme available for all the salaried employees. 12% of Basic Salary + Dearness Allowance shall be deducted by the employer for depositing in EPF or any other recognized Provident fund. An employee is also required to contribute the same amount per month.

A person with salary exceeding Rs. 15000/month shall be eligible for EPF investment. Interest rate on EPF for 2021-22 is 8.10%

Taxability: 100% balance of the fund + interest is tax free only when the same is withdrawn after a continuous service of 5 years. However, since 2020-21, any contribution by employer/employee voluntarily is above Rs. 2.50 Lakhs (Rs. 5 lakhs where employer has not contributed) in a year, then the interest earned on the amount in excess of Rs. 2.50 Lakhs shall be taxable. This has been done in order to curb excessive voluntary contributions.

3. Investment in Public Provident Fund

One of the most popular investment schemes amongst salaried & non-salaried individuals since it allows investment up to Rs. 1.50 Lakhs for a year & the interest earned is tax free. Its a safe option since PPF are long term investments backed by the Central Government with a healthy interest rate of 7.10%. However, it has a lock-in period of 15 years; partial withdrawal is allowed only after 7 years.

Taxability: No tax on interest earned on PPF investment.

4. Investment in National Pension System(NPS)

The Scheme initiated by the Central Government with an intention to provide a pension option to non-salaried professionals, self-employed persons, individuals working in the unorganized sector is another popular avenue for tax free investment. It can be construed as a self-retirement scheme.

Apart from the normal deduction of Rs. 1.50 Lakhs under Section 80C, an additional deduction of Rs. 50000/- is allowable under Section 80CCD(1)(B) for Tier I accounts, taking the total deductions at Rs. 2 lakhs.

The NPS Account may be opened by persons of age 18 to 60 years. Lock-in period shall be till the individual attains the age of 60, although partial withdrawals are permitted only after 3/10 years under special conditions & only up to 20-25% Generally, the returns are in the range of 9 to 12% and shall be taxed at maturity.

Taxability: Amount used for purposes other than buying an annuity plan shall be taxable.

5. Investment in Unit Linked Insurance Plan (ULIP)

These plans are hybrid in nature i.e. a mix of both investment & insurance. A part of the amount is allocated towards insurance & the balance amount is invested in the stock markets. Although no limit for investment, similar deduction threshold of Rs. 1.50 Lakhs applies for the ULIP. Since it is an investment in the stock markets, returns are varied as per the market swings.

Taxability: Principal amount, withdrawals and the maturity amount at the end of the term are tax free. However, like EPF where the annual premium exceeds Rs. 2.50 Lakhs in any year during the ULIP term, such proceeds shall be taxable.

6. Investment in Sukanya Samriddhi Yojana

It is a Central Government scheme aimed towards the enrichment & betterment of the girl child. An individual who is a parent/legal guardian to a girl child can open an account in her name till she attains the age of 10 years. Interest rate for this account is 7.6% Investment amount is restricted to Rs. 1.50 Lakhs per year. Withdrawals are allowed only when the girl child attains the age of 18 years & up to 50% of the amount invested.

Taxability: Interest earned is tax free.

 

7. Investment in Equity Linked Savings Scheme(ELSS)

ELSS are tax saving mutual funds where more than 65% of the amount invested is put into the equity market. In terms of liquidity, ELSS is the most sought option since the lock-in period is 3 years. Also, excellent returns can be expected due to the huge equity investment. Although, returns are not guaranteed, the best performing ELSS provides 12 to 15% depending on market conditions.

Taxability: Gains above Rs. 1 Lakh shall be taxed at 10% under Long Term Capital Gains.

Most of the above investments come with a lock-in period, which could be a drawback when it comes to liquidity. However, the silver lining is that the interest earned on such investments is compounded. The benefit of compounding proves to be a huge bonus in the inflationary times.

Now, along with the above mentioned investments following are certain expenses/payments which are eligible for tax deductions under Section 80C:

 

A. Payments for Life Insurance: Annual premium paid for life insurance (not health insurance) in the name of tax payer, spouse or children is an eligible expense for tax saving purpose. The deduction shall be valid only if the premium is equal to or less than 10% of the sum assured.

B. Repayment of Home Loan: The repayment of the principal amount (not the interest) or the principal portion in the EMI for a home loan (to buy/construct a residential property) shall be eligible for tax saving purposes under this section.

C. Payment of children's Tuition Fees: The tuition fees paid for education of up to 2 children of the taxpayer shall be eligible for deduction under this section. However, the fees should be for a full time course only & shall be paid to a school/college/university situated in India.

All these payments can be made and the deduction shall be restricted to Rs. 1.50 Lakhs in aggregate per year.

One should select the option which is most suitable to him/her based on their financial goals/needs. It is not always the case that the option with low/zero taxability is the best.

So, go ahead & plan your investments & expenses in order to gain the maximum tax benefits.


Published by

CA Niraj Navindgikar
(Practicing CA)
Category Income Tax   Report

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